The Tax-Cut Con

By PAUL KRUGMAN

Published: September 14, 2003

1. The Cartoon and the Reality

Bruce Tinsley's comic strip, ''Mallard Fillmore,'' is, he says, ''for the average person out there: the forgotten American taxpayer who's sick of the liberal media.'' In June, that forgotten taxpayer made an appearance in the strip, attacking his TV set with a baseball bat and yelling: ''I can't afford to send my kids to college, or even take 'em out of their substandard public school, because the federal, state and local governments take more than 50 percent of my income in taxes. And then the guy on the news asks with a straight face whether or not we can 'afford' tax cuts.''

But that's just a cartoon. Meanwhile, Bob Riley has to face the reality.

Riley knows all about substandard public schools. He's the governor of Alabama, which ranks near the bottom of the nation in both spending per pupil and educational achievement. The state has also neglected other public services -- for example, 28,000 inmates are held in a prison system built for 12,000. And thanks in part to a lack of health care, it has the second-highest infant mortality in the nation.

When he was a member of Congress, Riley, a Republican, was a staunch supporter of tax cuts. Faced with a fiscal crisis in his state, however, he seems to have had an epiphany. He decided that it was impossible to balance Alabama's budget without a significant tax increase. And that, apparently, led him to reconsider everything. ''The largest tax increase in state history just to maintain the status quo?'' he asked. ''I don't think so.'' Instead, Riley proposed a wholesale restructuring of the state's tax system: reducing taxes on the poor and middle class while raising them on corporations and the rich and increasing overall tax receipts enough to pay for a big increase in education spending. You might call it a New Deal for Alabama.

Nobody likes paying taxes, and no doubt some Americans are as angry about their taxes as Tinsley's imaginary character. But most Americans also care a lot about the things taxes pay for. All politicians say they're for public education; almost all of them also say they support a strong national defense, maintaining Social Security and, if anything, expanding the coverage of Medicare. When the ''guy on the news'' asks whether we can afford a tax cut, he's asking whether, after yet another tax cut goes through, there will be enough money to pay for those things. And the answer is no.

But it's very difficult to get that answer across in modern American politics, which has been dominated for 25 years by a crusade against taxes.

I don't use the word ''crusade'' lightly. The advocates of tax cuts are relentless, even fanatical. An indication of the movement's fervor -- and of its political power -- came during the Iraq war. War is expensive and is almost always accompanied by tax increases. But not in 2003. ''Nothing is more important in the face of a war,'' declared Tom DeLay, the House majority leader, ''than cutting taxes.'' And sure enough, taxes were cut, not just in a time of war but also in the face of record budget deficits. Nor will it be easy to reverse those tax cuts: the tax-cut movement has convinced many Americans -- like Tinsley -- that everybody still pays far too much in taxes.

A result of the tax-cut crusade is that there is now a fundamental mismatch between the benefits Americans expect to receive from the government and the revenues government collect. This mismatch is already having profound effects at the state and local levels: teachers and policemen are being laid off and children are being denied health insurance. The federal government can mask its problems for a while, by running huge budget deficits, but it, too, will eventually have to decide whether to cut services or raise taxes. And we are not talking about minor policy adjustments. If taxes stay as low as they are now, government as we know it cannot be maintained. In particular, Social Security will have to become far less generous; Medicare will no longer be able to guarantee comprehensive medical care to older Americans; Medicaid will no longer provide basic medical care to the poor.

How did we reach this point? What are the origins of the antitax crusade? And where is it taking us? To answer these questions, we will have to look both at who the antitax crusaders are and at the evidence on what tax cuts do to the budget and the economy. But first, let's set the stage by taking a look at the current state of taxation in America.

2. How High Are Our Taxes?

The reason Tinsley's comic strip about the angry taxpayer caught my eye was, of course, that the numbers were all wrong. Very few Americans pay as much as 50 percent of their income in taxes; on average, families near the middle of the income distribution pay only about half that percentage in federal, state and local taxes combined.

In fact, though most Americans feel that they pay too much in taxes, they get off quite lightly compared with the citizens of other advanced countries. Furthermore, for most Americans tax rates probably haven't risen for a generation. And a few Americans -- namely those with high incomes -- face much lower taxes than they did a generation ago.